Continuing Cookie Chronicle
(Note: This is a continuation of the Cookie Chronicle from Chapters 1 through 8.)
Part 1 Now that she is selling mixers and her customers can use credit cards to pay
for them, Natalie is thinking of upgrading her website to include the online sale of mixers
and payment by credit card. This would enable her to sell these mixers to a wider
range of customers using the Internet.
Natalie contacts her brother who originally prepared the website for her. He agrees to
upgrade the site so it can handle credit card security issues as well as direct order entry.
The cost of the upgrade is $1,800. This cost would be incurred and paid for during the
month of August 2012, and the upgrade would be operational September 1, 2012. Recall
that Natalie’s website had an original cost of $600 and is being amortized using the straightline
method over 24 months, starting December 1, 2011, with zero residual value. Additional
costs for website maintenance and insurance are estimated to be $1,200 per year.
If Natalie decides to upgrade the website, its useful life will not change and there
will be no change in residual value.
(a) Prepare the journal entry to record the upgrade.
(b) Calculate the monthly amortization expense before the upgrade and the accumulated
amortization and book value on August 31, 2012.
(c) Calculate the revised monthly amortization expense as of September 1, 2012.
(d) Calculate the accumulated amortization and book value on December 31, 2012.
(e) Explain to Natalie the difference in accounting for the website upgrade costs and accounting
for the costs incurred for website maintenance and insurance. In your explanation,
comment on the generally accepted accounting principles that affect the
accounting for these transactions.
Part 2 Natalie is also thinking of buying a van that will be used only for business.
The cost of the van is estimated at $38,500. Natalie would spend an additional $2,500
to have the van painted. In addition, she wants the back seat of the van removed so
that she will have lots of room to transport her mixer inventory as well as her baking
supplies. The cost of taking out the back seat and installing shelving units is estimated
at $1,500. She expects the van to last her about 5 years, and she expects to drive it for
100,000 miles. The annual cost of vehicle insurance will be $2,400. Natalie estimates
that at the end of the 5-year useful life the van will sell for $6,500. Assume that she
will buy the van on August 15, 2012, and it will be ready for use on September 1, 2012.
Natalie is concerned about the impact of the van’s cost on her income statement and
balance sheet. She has come to you for advice on calculating the van’s depreciation.
(a) Determine the cost of the van.
(b) Prepare a depreciation table for straight-line depreciation (similar to the one in
Illustration 9-9). Recall that Cookie Creations has a December 31 fiscal year-end.
(c) What method should Natalie use for tax purposes? Provide a justification for your choice.
Is she required to use the same approach for financial reporting and tax reporting?
This question was asked on Jan 06, 2013 and answered on Jan 07, 2013.
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